Platform businesses are taking over every industry and are already a part of our everyday life whether we realize it or not, from booking a cab to work (eg. uber) to online shopping (eg. amazon, Nykaa). Let’s understand the new evolving business ecosystem and how it is disrupting traditional businesses.
What Is Platform Business:
It is a new business model that uses technology to connect people, organizations, manufacturers, and resources in an interactive ecosystem in which amazing amounts of value can be created and exchanged. Oyo, uber, Facebook, IOS, amazon, and IndiaMART are a few examples.
Traditional vs. Platform business:
In traditional business which is called a pipeline business creates value through products or services by taking raw materials as inputs and creating products/services and pushing these to market in order to sell to customers.
In platform business there is no clear producer or consumer relationship. Sometimes producers become consumers and sometimes consumers become producers.Platform business creates and facilitates the means of connection
Example: In Indiamart or udaan the manufacturer of a product who lists his product becomes a producer and the same manufacturer becomes a consumer when he buys raw materials for his product from another seller on the same platform.
Features Of Platform business: Ecosystem Is New Supply Chain :
The platform business ecosystem is a new supply chain unlike in the pipeline business. Upstart OYO in one sense in the same business as Taj Hotels or Indian hotels. Like the hotel giants, it uses refined pricing and booking systems designed to allow guests to find, reserve, and pay for rooms as they need them. However, OYO applies the platform model to the hotel business. Oyo doesn’t own any rooms. It maintains a platform that allows hosts to provide the rooms to guests. In return, it charges a 10-20% fee for every rental arranged. Other hand Indiamart is a marketplace that connects the buyer with the sellers. Rather than taking possession of goods itself nor building inventory itself, it provides the platform to connect the marketplace among traders and buyers’ community
“Platforms don’t own the means of production – instead, they create the means of connection“
Oyo is bigger than the all listed hotels combined in India.
Network Effects :
Network Effects refers to the impact that the number of users of a platform creates value to other users. It creates enormous value for the platform company. A telephone connection is a classic example. Suppose only one person has a phone connection, it is not worth it. It requires the same phone in the hands of another person, then only it adds value.
Network Effects in a Telephone Network. The value grows as the number of users increases.
In classic platform style, Uber has the same effects. It helps riders find drivers and vice versa As drivers sign on and coverage density rises within the city, a number of striking growth dynamics are set in motion. Riders tell their friends and family. Wait time falls for riders and downtime for drivers. Thus less downtime means that Uber can cut fares and stimulate even more demand, which creates a virtuous cycle that increases density still further.
Same works for Zomato which is the food delivery platform. The more food delivery orders on the platform reduces the delivery cost which reduces the prices for customers, thereby leading to even more food delivery orders.
These network effects increase the stickiness and loyalty of both customers and restaurant partners, creating an interlinked virtuous circle.
“Physical assets and employees don’t scale well. Networks do“
As volume and network increases, ROI increases and can expand to new markets without capex where otherwise required in traditional business.
Matchmaking :
Some of the platform companies perform the matching service. Matrimony.com helps to match the brides and grooms who are looking for marriage. It is transforming India’s arranged marriage tradition. Similarly, naukari.com is again a platform that does matching services. It helps recruiters who are looking for job seekers and vice versa. NSE is also a platform that facilitates a marketplace among buyers and sellers of shares by matching the ask and bid rates of the traders. Now NSE is the world’s largest exchange in derivatives trading.
Users registered on matrimony are increasing. As users increase matchmaking among brides and grooms increases which will lead to more registrations.
All these companies are subscription-based businesses, where customers have to pay affront and enjoy negative working capital, unlike traditional businesses. They offer freemium models where customers get free tools and if they want to upgrade they have to opt for premium packages. As the business evolves more and more people will begin to migrate to online versions of matching.
Going Viral :
Going viral means the tendency of an idea or brand to be circulated rapidly & widely from one internet user to another. Companies offer attractive offers, cashbacks, and rewards to customers. It is like how politicians give freebies to voters during elections. Paytm was started as a platform that allows users to undertake payments for utilities like mobile, DTH recharges, and power bills. Initially to attract the users they have given cashback of 100% and referral codes. It made a buzz and drew attention. Initially days paytm spent around 600cr for cashbacks. Because of this, the user base grew from 11.8m to 104m. Because of network effects, the user base has increased. After it was reduced giving cashbacks on recharges gradually now almost zero. With that user base, it started movie tickets, Paytm Mall, Paytm Bank, and Paytm Money.
Zomato, Swiggy, CRED for that matter most of the unicorns today go viral by giving ads, cashback, and rewards, in order to cultivate the new habit and stick on to the platform. Zomato changed the way we eat today. It lured customers and restaurants by giving attractive cashback and discounts
Internet & Technology :
Of course, the internet and technology are the heart & soul of the platform companies. Internet opened the doors for platform businesses and technology enabled them to scale up. We cannot imagine the world without the internet. Smartphones and low-cost data have enabled internet penetration.
Lower data led to high consumption:
Top Global companies Are Platforms :
Seven of the 10 most valuable companies globally are now based on a platform business model: the creation of digital communities and marketplaces that allow different groups to interact and transact. Companies like Apple, Google, Amazon, and Alibaba have used the model to grow exponentially and grab significant market share from established firms.
Indian Platforms :
All platform companies are upcoming and will become monopolies over the decades of time. Platforms represent a big change in the way industries have traditionally been organized. And the first-mover advantage is important in an environment where the winner often takes all.
Each of these companies was built around the internet. But more importantly, they are all platforms. Rather than merely squeezing a little more efficiency out of existing business, their business operates on a completely different model depending on the internet’s potential.
It’s high time to think and track closely and add these companies to portfolios.
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